Capacity Market Confusion Affects the Whole Market

CAPACITY MARKET CONFUSION AFFECTS THE WHOLE MARKET

The UK’s Capacity Market has been suspended following a legal challenge by an energy technology firm, Tempus Energy. The EU court’s ruling annuls a decision by the European Commission which had said the scheme was not in contravention of EU State Aid rules.[1] It could have major implications for all businesses involved in the UK’s energy market.

UNCERTAINTY COULD THREATEN SECURITY OF SUPPLY

The Capacity Market was introduced in 2014 to ensure electricity supplies, particularly at peak times during the winter. It provides payments to owners of reliable generating assets, mainly gas-fired power stations, for keeping them operational and the energy they supply.[2] Capacity Market payments are a significant source of revenue for many businesses that operate these plants. Without these revenues the financial viability of existing and new plants may be at risk. A supply gap could be critical as coal and older nuclear power stations are shut down and more renewables are introduced into the system.[3]

THE RULING WILL HAVE AN IMPACT ON SUPPLIERS’ CASHFLOWS

Suppliers collect money through consumer bills to fund the Capacity Market. With payments suspended there are questions about what now happens to this money. Ministers have urged suppliers to voluntarily cut tariffs[4] but this raises doubts about how generators will be paid if the system is reinstated.

There are also implications for the recently announced price cap and whether the Capacity Market component forms part of Ofgem’s calculation. The level of the cap that is due to be introduced in January was set to account for the costs of the scheme.[5]

IT COULD OPEN UP A NEW DISCUSSION ON HOW THE CAPACITY MARKET IS USED

Those with interests tied to the capacity market will need to increase engagement with policymakers now, as many will see the ruling as an opportunity to restructure the scheme to support alternative technologies including renewables. The Shadow Minister for Energy and Climate Change, Alan Whitehead MP called for the Government to rethink the scheme criticising it as a ‘bizarre arrangement which simply throws money at old dirty power stations.’[6]

BUSINESSES CAN OFFER SOLUTIONS

The Government says it is focussing on ensuring the Capacity Market can be reinstated as soon as possible but it is not obvious what will happen. Businesses from all parts of the system must engage in order to help shape policy decisions and construct a favourable environment.

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